A ring of five Seattle-area women has been charged with taking out more than $690,000 in fraudulent private student loans, raising concerns by some federal officials that the kinds of abuses that have hammered the subprime mortgage sector may also be lurking in the student lender field.
In an indictment filed in early June in Seattle's federal district court, prosecutors allege that beginning in 2005, Kathy L. Hardy, 59, of Renton, Wash., her two daughters, ages 35 and 20, and two 36-year-old associates filed more than 70 applications for private student loans, often using other people's names or Social Security numbers.
According to the indictment, the vast majority of the women's applications were unsuccessful. But it charges that at least 24 fraudulent loan applications were approved. In a search warrant recently made public, investigators allege that the lenders sent checks—some for more than $40,000—to the women's addresses.
Although made to students, private educational loans are simply standard business transactions, little different from, say, auto loans. Banks typically charge comparatively high interest rates but try to make the applications quick and easy. In contrast, to obtain low-cost federally guaranteed Stafford or Perkins education loans, the federal government requires that students fill out the extensive Free Application for Federal Student Aid, and it requires schools to certify much of that information. The federal government caps the amount it will loan to an undergraduate, typically at a few thousand dollars a year. In addition, federal loan payments are usually made directly to a college and aren't sent to a student's home address.
Investigators and prosecutors say the women took advantage of private lenders' eagerness to make big, higher-interest loans. They also believe the defendants took advantage of a wrinkle that makes fraud in student loans harder to catch than, for example, mortgage fraud. Many lenders allow students to defer payments for as long as they are in school, which can easily mean four or five years. That means borrowers with no intention of paying don't attract lenders' or identity theft victims' attention by defaulting quickly. Finally, the investigators believe the women were able to keep taking out loans for two years despite a trickle of complaints from identity theft victims in part because of the Federal Bureau of Investigation's shift in focus to terrorism, which has slowed prosecution of some other types of cases.
While the credit crunch and some reform proposals may make things tougher for future fraudsters, federal officials say the details of this case raise worries that "there are more cases like this out there." Joseph Velling, the Seattle-based special agent in the Social Security Administration's Office of the Inspector General, who spearheaded the investigation, said lenders approved loans based on applications that should have raised warning flags. "What I found surprising was that these checks were mailed to people living at addresses that hadn't been verified well enough. . . . Banks can check Social Security numbers and names" to make sure they match, for example, he noted.
Some of the fraudulent techniques alleged in the indictment and search warrant appeared to be sophisticated. Velling said, for example, that the defendants used Social Security numbers of people who have the same name or a similar name as the defendants. And the search warrant alleges that the women sometimes provided copies of doctored driver's licenses.
But the search warrant also charges that many loan checks were sent to the same addresses. And it says that in some of the applications, the applicants' names did not match Social Security numbers. Velling added that in at least one case, the Social Security number of a dead person was used.
He said the lenders' investigators became aware of the possible fraud but had trouble persuading federal agencies to take an official interest: "These companies are sitting on more fraud, but they can't get anybody to work them."
Velling said he happened to be working the Seattle FBI office on another case last fall when a call came in from a victim complaining that someone improperly had taken out a student loan in her name. The FBI asked Velling to lead the investigation. By teaming up with other federal and local investigators, as well as the fraud investigators employed by lenders, he says he found many other loan checks that went to the same home addresses or to people with similar-sounding names. "The applications were all done on the Internet. I don't know of one case where there was a face-to-face meeting," Velling added.
Saturday, July 5, 2008
Five Charged With $690,000 in Student Loan Fraud
The Problem with Federal Loan Forgiveness Programs
One of the Education Department's top higher education officials says there are significant problems with two of the most-trumpeted new loan forgiveness programs designed to help students afford college.
The public service loan forgiveness program that will begin in 2009 makes good headlines, Diane Auer Jones, assistant secretary for postsecondary education, told attendees of a Washington, D.C., College Savings Foundation conference this month. But many idealistic students hoping to get out from under their federal education debts will be sorely disappointed, she says.
"Guess what? You have to make 10 years of payments," before the remainder of the loan is forgiven, she notes. And most federal education loans are 10-year loans, which means there will be nothing left to be forgiven.
The Education Department is worried "some students will see the program and take on more debt than they would have otherwise, not realizing it is unlikely that most of it will be forgiven," she says.
In addition, the new "Teach grants" that this year started paying up to $4,000 a year to those studying to be teachers in needy schools will turn into costly mistakes for the vast majority of recipients, she says. Teachers who do not end up working in classrooms that qualify as "high need" will see those grants they received while in school turn into loans. Jones says the Education Department's experience with other similar programs indicates 80 percent of the recipients of Teach grants will have to pay them back with interest. The problem, she says, is that newly graduated teachers are having trouble getting hired by what she called "dysfunctional" but needy schools.
Robert Shireman, director of the Project on Student Debt, says that people should realize the new public service forgiveness program will help only those who take low-paying public service jobs. Borrowers who take on high-paying government or nonprofit jobs will have to pay off their loans, he said.
Anyone hoping to take advantage of the loan forgiveness program should make sure to consolidate loans with the federal government's new Income-based Repayment option, Shireman said. That way, low-paid public service workers will have to pay only a reasonable portion of their salary toward their loans, which could be lower than the regular loan payment. After 120 payments, the remainder of the loan will be forgiven. More information can be found at ibrinfo.org.
Congressional staffers say they are working on fixes to the Teach grant law to prevent the kind of unhappy surprises Jones warns of. A major education bill currently being discussed in House-Senate negotiations would broaden the definition of high-need classrooms and give the Education Department the power to give breaks to students who try but fail to get hired by needy schools.
source: usnews
Cheaper, Bigger, and Cooler Student Loans
Finally, students and parents can celebrate a little good news: It's getting a little easier and cheaper to borrow for higher education.
The government has responded to the credit crunch by allowing all undergraduates to borrow more money from one of the cheapest federal loan programs, cutting interest rates for needy students, and easing repayment for strapped parents. In addition, while turmoil in the financial markets has driven some banks out of the student loan business, it has attracted upstart companies that are now offering students help making alternative arrangements, such as borrowing from rich relatives. So with a little shopping around, students and parents should be able to find lenders offering at least a small discount on modest-size educational loans.
More money: New federal rules taking effect July l increase the amount that almost every full-time undergraduate will be able to borrow from the federal Stafford program to at least $5,500. The newly expanded federal Stafford loan program will allow upperclassmen to borrow up to $7,500. Students older than 24 or who are independent from their parents can borrow at least $6,000 more than that.
The Stafford loan will cost students no more than 6.8 percent a year in interest and 2 percentage points in fees, for a total annual rate of 7.25 percent. And despite the credit crunch, some lenders are still waiving the fees and offering other small discounts.
Lower-cost loans: In addition, Congress cut the interest rate Stafford loans will charge students who qualify as needy to just 6 percent for the academic year that starts in the fall of 2008. It also has ordered further small cuts to the "subsidized" Staffords (which go only to needy students) in future years. Those reductions will cut the total cost of repaying the loan over 10 years by hundreds of dollars.
Best of all, nearly every student who fills out a Free Application for Federal Student Aid—even those who filled out a FAFSA just a few weeks before school starts and whose parents have high or low incomes—can receive a regular federal Stafford loan.
Once students have graduated, those who go into low-paid public service jobs may eventually get some of their education loans forgiven.
Payment flexibility: Parents are also getting a break under the new rules. Parents who take out a new federal PLUS loan—which can cover their child's full cost of attendance after considering other financial aid—will be able to defer payments until six months after the student leaves school. Also, parents facing financial difficulties because of the housing crunch or medical bills may now be able to get a PLUS loan, despite a poor credit record.
Although they offer some special goodies, such as free insurance, PLUS loans aren't cheap. Lenders can charge a maximum fixed rate of 8.5 percent a year plus 4 percentage points in fees, giving a true maximum annual percentage rate of 9.4 percent. (If a parent gets rejected for a PLUS loan because of credit problems, the student can borrow as much as $7,000 a year more through the Stafford program.) Education loan payments are tax deductible to parents with low and middle incomes.
That's why many parents with good credit, solid income, and home equity find that private loans are often better deals. Parents who can persuade a bank to let them tap their home equity despite today's housing and credit crunches may find banks willing to offer rates that start out as low as 4 percent in the summer of 2008 (though, of course, those rates and payments will very likely rise over time). Homeowners not subject to the alternative minimum tax may be able to deduct the home equity payments from their taxes.
Parents who don't want to touch their home equity may be able to find banks willing to make unsecured loans at similarly attractive rates. Discover Financial Services, for example, says it is offering borrowers with credit ratings in the top 20 percent private education loans at half a percentage point below the prime rate—which means it's charging just 4.5 percent in the summer of 2008. Of course, the payments on those loans will rise when prime rises, as it probably will.
Many parents also prefer private loans because they hope to eventually transfer the debt to the child. But advisers warn that although the student's name may be first on the loan, it can be hard to remove a parent's responsibility for the debt if the student ever defaults.
New and different: Several upstart companies have emerged to help students and parents looking for even cheaper and easier ways to borrow. Students who find a friend or relative willing to lend them college money can pay a small fee to Virgin Money or Greennote to do the paperwork to turn informal lending agreements into business deals that are billed and treated like bank loans. Fynanz is attempting to line up investors willing to lend to students they don't know. It typically demands students be backed by a cosigner.
July 1 Brings Record-Setting Drop in Student Loan Interest Rates
PHOENIX, AZ -- 07/02/08 -- Both new and current student loan borrowers of certain federal Stafford student loans saw two interest-rate drops go into effect yesterday that could save them significant amounts of money on these fixed- and variable-rate student loans. Borrowers with variable-rate Stafford loans saw the biggest rate drop -- three percentage points -- due to the general interest-rate cuts made by the Fed over the past year.
Borrowers holding both subsidized and unsubsidized variable-rate Stafford student loans -- those Stafford loans that were disbursed between July 1, 1998, and June 30, 2006 -- received their record-setting rate reduction when the interest rate on those student loans reset on July 1, as it does every year.
As a result of the rate cuts made by the Fed, borrowers with variable-rate Stafford loans that are in repayment or forbearance saw their interest rate drop from 7.22 percent to 4.21 percent. Borrowers with variable-rate Stafford student loans who are still in school, in their grace period, or in deferment saw the interest rate on their student loans go from 6.62 percent to 3.61 percent.
Borrowers with subsidized Stafford loans that were disbursed on or after July 1, 2006, also saw a reduction in their interest rate, albeit a much smaller one. The rate on these student loans, which was previously fixed at 6.8 percent, dropped to 6 percent yesterday and will continue to fall over the next four years for both new and current borrowers, eventually dropping to 3.4 percent in 2011.
This phased-in reduction to subsidized Stafford loan rates comes as part of the College Cost Reduction and Access Act of 2007, which also increased federal grant aid to needy students. The fixed rates on subsidized Stafford student loans will be incrementally reduced on July 1 each year until July 1, 2012, when interest rates are set to revert back to 6.8 percent, barring new legislation that keeps the rate reductions in place.
Unsubsidized Stafford student loans are unaffected by the legislation. Unsubsidized student loans are those in which borrowers are responsible for all interest that accrues, even if they are not currently required to make any payments on their student loan, as when they are in school at least half time or in an authorized period of deferment. With subsidized college loans, on the other hand, the government will pay any interest that accrues while borrowers are in school at least half time, in an authorized deferment period, or in the grace period they are granted after leaving school, before they must begin repayment on their college loan.
The interest rate on unsubsidized Stafford loans that were disbursed on or after July 1, 2006, remains fixed at 6.8 percent.
Yesterday's rate reductions also apply to federal consolidation loans, which allow borrowers to bundle all their eligible federal college loans -- both fixed-rate and variable, subsidized and unsubsidized -- into one single student loan with a fixed interest rate. Those who consolidate their Stafford student loans while in their six-month grace period could consolidate at a fixed rate as low as 3.61 percent.
"This is not only the biggest drop ever in the in the interest rates on variable loans," says Mark Kantrowitz, publisher of the financial aid website FinAid.org, "but the lowest rates in the history of the student loan program."
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